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Undeclared Income from Online Transactions Leading to Large Penalties

Yomiuri Shimbun file photo
National Tax Agency

Cases in which people do not declare large amounts of income on tax returns, especially money earned online, are running rampant.

The results of a nationwide survey released Wednesday by the National Tax Agency revealed that a record-high ¥22.4 billion in additional taxes were slapped onto people who failed to declare their full income in the previous fiscal year. In recent years, there has been a noticeable uptick in people not declaring income earned online and through social media. Japan’s tax authorities are devoting their investigation resources mainly to malicious cases and those involving large amounts of undeclared income, but these operations face many challenges.

According to the agency, a female influencer on social media who was investigated by the Osaka Regional Taxation Bureau claimed she believed money she earned online would fly under the radar.

“I thought if I didn’t declare that income, it wouldn’t get detected,” the woman reportedly said.

Companies asked the woman to share content about things like children’s clothing on her blog and Instagram to promote them. She received substantial remuneration that varied depending on certain factors, including the number of her online followers. However, she did not declare any of this income in several years and declared only part of these earnings in other years.

The bureau’s investigation revealed that the woman had destroyed records of her transactions with those companies. For five years through 2021, the woman was found to have concealed about ¥95 million in income. She was ordered to pay ¥40 million in income tax, which included a heavy penalty for tax underpayment.

Last year, tax authorities also discovered cases in which women had not declared income received through the practice of gyaranomi, or attending drinking parties with men arranged through a smartphone app. A woman investigated by the Tokyo Regional Taxation Bureau had not declared any of the payments she received from the app operator.

The woman told investigators that she thought the tax had been deducted from those payments. However, the bureau checked with the app operator and found that no such arrangements were in place. The woman failed to declare about ¥40 million over three years through 2020 and was ordered to pay ¥11 million in income tax, which included an additional penalty for not filing a return.

Penalties reviewed

Allowing the problem of undeclared income to run rampant could erode the public’s sense of fairness regarding taxes. Due to the COVID-19 pandemic, the number of undeclared income cases being investigated has declined in recent years, but the amount of tax penalties imposed has been increasing.

According to the survey results released Wednesday, Japan’s regional taxation bureaus investigated 5,229 cases of people not declaring income tax between July 2022 and June 2023. These cases involved a total of ¥141.8 billion in income going undeclared. Additional taxes imposed as a penalty in these cases surged by 17.9% from the previous year, hitting a record high.

In recent years, e-commerce conducted online has become more diversified and there have been many cases in which massive profits acquired through crypto-assets and foreign exchange transactions have gone undeclared. In March 2020, the Kanazawa Regional Taxation Bureau informed the local public prosecutors office that a company executive in his 50s from Ishikawa Prefecture was suspected of violating the Income Tax Law by evading ¥77 million in income tax payments by not declaring about ¥199 million in earnings raked in from transactions of crypto-assets such as bitcoin.

In a bid to add more bite to legal deterrents to such wrongdoing, this fiscal year’s tax system reforms strengthened the additional taxes that can be imposed as a penalty on people who do not declare all their income. The rate of this penalty for taxes payable that exceeds ¥3 million was increased from 20% to 30%. This will be applied to income tax in final tax returns from next year.

Hitotsubashi University Prof. Motohiro Sato, an expert in public finance, believes greater awareness is needed to address this issue.

“In many cases, company employees and other people who dabble in transactions of crypto-assets and other financial instruments as a side job are unaware that they’re required to declare this income,” Sato said. “This low level of awareness about tax payments is a factor, so I think it would be good to have a system in which such exchanges are obligated to withhold taxes at the source.”

Attempts to make contact ignored

In cases in which income has not been declared, people subject to investigation by tax authorities often stonewall these proceedings. One person suspected of failing to declare income acquired through international and domestic crypto-asset transactions even ignored phone calls and written notifications from tax authorities for at least one year.

When conducting an investigation, tax authorities can, based on the right to ask questions and conduct inspections under the Law on General Rules for National Taxes, demand the subject of the investigation hand over account books and documents and provide explanations for their actions. Failure to respond to these demands without a proper reason is punishable by up to one year in prison or a fine of up to ¥500,000.

According to the National Tax Agency, these punishments are rarely applied. This appears to be the result of comprehensively weighing up and considering what can be gained with criminal punishment as well as people and time that such proceedings involve.

The government’s Tax Commission, an advisory body to the prime minister, is also growing increasingly concerned about the situation. In a report issued in June, the commission mentioned new administrative measures should be considered in the event that a person refuses to assist a tax-related investigation for a prolonged period. The Finance Ministry has no concrete plans for such steps at this stage.

“We share an awareness of the problem and consider this an issue that needs to be addressed in the medium term,” a ministry official said.